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KPMG leads way in aviation finance

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The aviation finance sector is one of Ireland’s great success stories, according to Tom Woods, partner and head of aviation finance and leasing at KPMG.

“Ireland is associated with aircraft leasing due to the development of the industry here by Tony Ryan’s Guinness Peat Aviation (GPA) which at its time became the largest aircraft lessor in the world,” said Woods. “Its success and ultimate demise paved the way for many new entrants to the sector in the late nineties and early 2000s. Four of the top five lessors have ties to the GPA fold,” he said.

“The two largest lessors, Aercap and GECAS, each started with leasing businesses carved out of GPA. The third and most recent mega lessor, Avolon, was built by GPA alumni, as was the case for SMBC Aviation. The knowledge and expertise created by and through GPA with the support of government has enabled Ireland to carve out and retain a leading role in this truly global industry.”

Woods said the aircraft leasing industry plays a key role in enabling global commerce. “The industry is financing and enabling greater worldwide connectivity, helping to develop social and economic ties between countries across the world. There is a strong correlation between GDP and passenger traffic with passenger traffic typically tracking two percentage points above GDP,” he said.

“Passenger traffic is forecasted to grow by approximately 5 per cent per annum over the next 20 years which has historically been the 10 year growth trend. This would lead to a doubling of passenger traffic demand over the next 15 years. Passenger traffic growth is currently running at 7.9 per cent for first eight months, well ahead of the 10 year growth trend, leading some to speculate that this could see a doubling of passenger traffic in a much shorter timeframe.”

To put the growth into perspective, Woods said, just under four billion passengers are currently flown one way each year and this would double to 8 billion passengers by the early 2030s.

“This is an enormous increase in passenger traffic which translates into demand for over 42,000 new aircraft worth more than US$4 trillion over that period with an average $170 billion of finance needed each year for the next 10 years,” he said.

“The aviation finance sector plays a major role in funding these deliveries. Aircraft lessors currently fund just over 40 per cent of all new deliveries and over half of these are owned and managed out of Ireland,” said Woods.

“The rate of growth of the leasing industry has increased over time in a market that is doubling every 15 years.”

In 1970 lessors accounted for 0.5 per cent of the market which grew to approximately 2 per cent by 1980. By 1990, lessors accounted for around 15 per cent, rising to around 25 per cent by 2000 and to approximately 40 per cent today.

“Lessors are growing in a growing market and Irish leasing businesses are at the heart of it. Today we see enormous investor interest in the leasing sector right across the capital stack,” said Woods. “This investor interest has driven a rapid expansion in the number of sidecars and joint ventures established with aircraft lessors as well as significant interest in aircraft asset-backed securitisations.”

KPMG expects a number of additional transactions to come to market before year end.

“It has been a very busy year for us. The macro-economic environment is very favourable – fuel is relatively stable (although spiking recently), interest rates are low although beginning to tick upwards, airline operating margins remain generally good, global GDP is rising and passenger traffic growth is well above trend,” he said.

“With such growth in the sector comes a desire for companies to achieve a certain scale. Consolidation remains a key theme,” said Woods.

“This year we were delighted to be involved in DAE’s acquisition of AWAS, which follows on from last year’s acquisition by Avolon of CIT Group’s aircraft leasing business. It is likely that there is more consolidation to come.”

KPMG has worked with the sector from its beginnings in Ireland and has been identified as one of the most influential companies operating in the global aviation sector.

“We have been lucky enough to work with almost every aviation finance industry player, advising on transactions in over 150 countries worldwide,” said Woods.

“As well as our core audit and tax services, we are seeing increasing interest in our advisory service offerings including due diligence, operational improvement, modelling and securitisation services. This is consistent with the activity levels and transactions in the market.”

These activity levels, driven by the broader investor interest in and growth of the sector, have created some challenges and opportunities.

“Pricing of aircraft and leases has become very competitive, particularly in the new aircraft channel,” said Woods. “The ability of lessors to secure access to cheap capital places them at a competitive advantage. Lessors continue to be very active in the debt capital markets with over US$12.5 billion of unsecured US$ capital markets issuances so far this year.”

He said the scale of deliveries of new aircraft was also increasing the volume and frequency of aircraft trading in the secondary market.

“The process around secondary trading of aircraft is currently a time consuming and expensive process. The process needs to become more efficient and KPMG is delighted to be working with the Aviation Working Group to help design an improved process to transfer aircraft,” said Woods. “Improving this process will improve the liquidity of aircraft, which will benefit the sector as a whole.”

The growth of the aviation leasing and financing sector is also putting pressure on attracting talent. KPMG is supporting UCD’s Masters in Aviation Finance which is now in its second year. The course is also supported by a number of the large lessors and one of the engine manufacturers.

“The feedback from the first year has been very positive and we hope this course will become the initial training ground for the future leaders of the industry,” said Woods.

“Creating a strong pipeline of talent in Ireland will help address substance requirements which are expected to become more of a focus in accessing tax treaties (a key requirement in this industry) as well as help maintaining Ireland’s competitive position in the face of greater competition from other countries such as Hong Kong, Singapore and the US,” he said.

“Meanwhile, government’s continued support of the sector, including its IFS2020 strategy to drive the growth and development of international financial services in Ireland, remains key.”

This article was originally published in the Sunday Business Post, 'Aviation, Leasing and Finance' supplement on 13/11/2017 and has been reproduced here with their kind permission.